April 19, 2022
From 1997 to 2012, Scott Tucker built a nationwide network of payday lending businesses, becoming a pioneer in online lending along the way. Many of his borrowers could not access credit from commercial banks and depended on payday loans as a financial lifeline to cope with emergency expenses. But in 2012 federal prosecutors indicted Tucker on several criminal charges that he violated disclosure requirements. He was later convicted on 14 charges, including racketeering, misleading disclosures, and fraud.
Harvard Business School associate professor Aiyesha Dey discusses how the case, “Scott Tucker: Race to the Top,” examines the role of individual leaders in the corporate governance system, as well as their responsibility for creating a positive corporate culture that embodies ethics, self-restraint, and a commitment to serve.
BRIAN KENNY: Flashcash, Money Shack, Snappy Loans, Check ‘n Go. Any of these sound familiar? Probably not. These are just a small sampling of the roughly 23,000 payday lenders in the United States. Catchy names and pithy slogans are their calling cards. Need a loan? You’re not alone. And then there’s this beauty: Need some cash? We kick ash. It’s simple to make light of such come-ons, but all too often, those most receptive are also those who are most desperate and least able to comprehend the repayment terms of the money they’re borrowing. Unscrupulous lenders have been around for decades, but recently regulations have tightened up and platforms such as Google and Facebook have banned them from advertising. But accountability can be hard to come by in an industry that deftly toes the line between legal and illegal lending. Today on Cold Call, we’ve invited Professor Aiyesha Dey to discuss her case entitled, Scott Tucker: Race to the Top. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents Network. Aiyesha Dey is an expert in the areas of corporate governance, behavioral finance, and financial reporting and disclosures. All of which I think come into play today. Aiyesha, thank you for joining me.
AIYESHA DEY: Thank you, Brian, for having me.
BRIAN KENNY: Great to have you here. I think people will really enjoy hearing about this case today. It’s an important case. It addresses a really important topic.
AIYESHA DEY: Thank you.
BRIAN KENNY: And I think everybody has seen the kinds of commercials that I teased in the opening. We’ve all seen them. We all kind of scoff at them, but really there are victims at the end of this. There are people who are impacted by this in a very negative way. And the case does a great job of highlighting what some of the impact of that is, and really focuses in on a character who sounds like he could be out of Hollywood. In fact, if somebody has an option to screenplay on this, they might want to. Scott Tucker sounds a lot like the guy that Leonardo DiCaprio played in Wolf of Wall Street.
AIYESHA DEY: I would say that.
BRIAN KENNY: That’s what I was thinking anyway. So let’s just dive in. Let me ask you to start by telling us when you step into the classroom, what would be your cold call to start this case?
AIYESHA DEY: I would start with the question: If you were a lender, would you lend to Tucker’s businesses? Why or why not? So, the reason I start with that is because we try to get really discussion debate around two themes. The first is the industry itself. So, this industry is a little bit atypical to the ones we really discuss at HBS, and it’s very controversial. It has this reputation of being predatory, abusive. On the other hand, it does cater to a very serious need of people who no one else will lend to. So, it’s controversial and it’s nice to get students’ feelings out there with questions like, should it even exist? And if so, how would you design a governance system around it to increase trust in this industry? So, that’s the first theme. And then we move to the second with that question. So, regardless of the industry, would you lend to Tucker per se, or would you work for him? What trade-offs do you face in working or partnering with a person like Scott Tucker?
BRIAN KENNY: Let’s talk a little bit about why you chose to write the case. How did you hear about Scott Tucker, and how does this relate to the kinds of things that you think about as a scholar?
AIYESHA DEY: So, this case, Scott Tucker is really a textbook example of some of the things I work on in research. So, very briefly, what I study is how can lifestyle choices of individuals, executives, in my case, give you a sense of what the underlying values or personalities or characters are. And do we see those manifested in their corporate on the job behaviors? So, you may not because as corporate governance systems, compensations can neutralize all these individual differences. But what we find in our work is that lifestyles actually could be symptoms of underlying values, which are not neutralized in the corporate setting, and they are manifested in your work life. And I typically have focused on two such lifestyle choices. One is what psychologists call a materialistic lifestyle, which is very extravagant of a very heavy focus on wealth, status, possessions, which conflict with values that focus on welfare of others, of the environment and even your own personal spiritual growth. So that’s one. And the second lifestyle choice I focused on was a record of criminal infractions. Tucker had both of those, and they manifested in his corporate behavior. So he really formed a fascinating anecdote that brought my research findings to life. So, I thought it would be interesting to write about him, think about him, bring that to the classroom.
BRIAN KENNY: It is. And we’re going to talk a little bit more about what some of those characteristics are as we get further into the discussion. But maybe just, if you can set the context for all listeners who aren’t familiar with payday, the payday lending industry, what does that landscape look like? Who are the players that are involved, and who are the customers that go there?
AIYESHA DEY: Right. So, payday loans are typically of small magnitudes. They’re very short term, typically two weeks, very high interest. And they’re unsecured. The name refers to customers who need loans to bridge them until their next paychecks, hence the term payday loans. So, these lenders, what they do is they typically issue cash loans and they would hold borrowers personal checks for future deposits. So, once payday comes, which is about two weeks later, the lenders would deposit those checks and recoup the principle as well as the interest amount. Of course, with online lending, they held electronic debit opportunities, et cetera. So, that’s what the industry is. Now, the reason it flourished is because typical commercial banks and other traditional sources of credit wouldn’t want to lend to the customers that went for payday loans. So, these were typically lower income or erratic income individuals. They had bad credit or insufficient savings. So, commercial banks didn’t want to lend to them because of very high default risk. Hence, the payday lenders and other similar businesses came and filled in this market gap. If you think about the customers, recent survey did some, a demographic analysis. So, they are typically within the 40 to 61 year old range. They have at most a high school education. Most have about less than 70,000 in annual income, are typically non-white and female. Majority of these have very poor credit score, and they end up having, taking out multiple loans per year. So on average, they stay about 196 days a year in debt. So, yeah, I think they prefer or at least the survey indicates what these customers have said is why they prefer payday loans is because of its speed, convenience, discretion. They don’t run credit checks. So, this is why they prefer the payday industry.
BRIAN KENNY: Yeah. So. it’s easy to see how people who fit that profile could be victimized. I mean, they’re in probably in dire circumstances. They need money really badly, yet the commercial banks won’t lend to them. And there’s a reason why the commercial banks won’t do that. So, it does set up a really troublesome dynamic, and we can talk a little bit more about that too. But there’s regulation. Right? There is the Truth in Lending Act. I mean, do any of the regulations, excuse me, that are in place serve to police the behavior of these firms?
AIYESHA DEY: Yeah. So, there’s typically, there’s regulation at the state level as well as at the federal level. So at the state level, you have the state Attorney Generals that customers can take their complaints to, or you have the Better Business Bureau, organizations like that. At the federal level, you have the FTC, the Federal Trade Commission, which tries to both promote competition as well as try to protect the consumers. So, the FTC plays a big role here. And as you pointed out, Brian, the TILA, the Truth in Lending Act is one primary disclosure regulation that tries to govern the payday lenders. So, essentially what this says is that lenders have to very clearly state the loan terms so consumers can understand and compare the terms to different lending opportunities. Typically you have something called a TILA box, which has to state, okay, this is the amount you’re borrowing, the principal, here’s the finance charge. Here’s the APR. And here is the total you’ll end up paying, including your principal and interest. It’s supposed to be very supposed to be very clear.
BRIAN KENNY: Supposed to be, supposed to be.
AIYESHA DEY: Supposed to be.
BRIAN KENNY: But we know that is fine print in all of these things, and you often need a lawyer to read it with you to fully understand what you’re looking at, and that factors into the case too.
AIYESHA DEY: Exactly.
BRIAN KENNY: There’s some great exhibits in fact at the end of the case that show that what they put on the surface isn’t necessarily what’s the most important information for people to see. So, you’ve done a good job laying the groundwork for what the industry is. Let’s talk about Scott Tucker a little bit. Who is he? What’s his background?
AIYESHA DEY: He came from humble beginnings. So he was born in 1962. He grew up in Kansas City, Missouri. He had two brothers, Blain and Joel. His father was a World War II veteran who worked for insurance all his life. His mother was in education, who was a teacher during Tucker’s childhood. She actually had a janitorial business, which Tucker worked in when he was in high school. So, he worked as a janitor. After high school, he studied business administration at Kansas State University for a couple of years. And he even at that point, he displayed a lot of entrepreneurial spirit. So side by side with academics, he would pursue entrepreneurial opportunities and be quite successful in many of them.
BRIAN KENNY: But at some point, he stepped in the wrong direction and got into some legal, illegal activity. Can you talk a little bit about that? Sort of the beginning of that slide, because that really factors into his life later on.
AIYESHA DEY: Right. I mean, right after college actually, and it started small. The case is, I should mention, written based on public sources. We did reach out to Mr. Tucker to speak with us, but he didn’t want to talk. So this is all from public. So, as far as we know, it started from after college. He started by borrowing about $50,000, but he lied on the collateral by offering a Porsche as collateral, which we he didn’t own. So, little minor indiscretions like that. Then he passed a bad check, but then he stepped it up by doing a multi-state fraud. What he did was he posed as a loan officer at a fictitious investment bank, Chase Morgan Sterns and Lloyd, and he got at least 15 borrowers to send him more than 100,000 in fees without offering any of the promised commercial loan funds. But he was found guilty. He served a year in federal prison and three years probation.
BRIAN KENNY: So, let’s talk a little bit about that. So now he does serve a year for those first infractions that he’s caught for. How does he find his way into the payday lending business?
AIYESHA DEY: So, I believe in 1997, he met, he befriended someone who was a payday lending operator, veteran payday lending operator who taught, he became his mentor, taught him the ropes of the business, and that sparked his interest in the industry. And even his entry was kind of covered in fraud because his mentor lent him $500,000 to start a store as business partners. And eventually Tucker kept lying to him and saying that he was opening other stores where the two of them were together, but Tucker was actually the sole proprietor. And anyway, that’s how it began at least. And then he and his brother, and eventually they partnered with Tim Muir who was a lawyer and the three of them started expanding their payday empire.
BRIAN KENNY: And they expanded it rapidly. I mean, it was just a matter of a few years where they went from having the initial storefront, into a much more rapid expansion and scaling. Can you describe that a little bit?
AIYESHA DEY: So, I think they started from a strip mall in the Kansas City suburbs, and they did business as Mr. Money. They used the slogan, “Fast Cash” and basically, even Tucker said, “If a customer could confirm they had steady employment, they could provide one pay stub, we would issue cash in exchange for a post-dated check. No questions asked.” And then by … this was about 97, 98. But then by 2005, they had many locations, various names. For example, Cash Advanced, Preferred Cash Loans, United Cash Loans, United Fast Cash, et cetera. Each had its own loans, but it was really Tucker, his brother Blain and attorney Tim Muir, and they managed the operations through an umbrella entity called CLK Management. But then very soon after that, they went online and with sites such as OneClickCash and this Tucker describes as a purely entrepreneurial move, because back then he says that it was like wild, wild west on the internet. Nobody knew what to expect, what was coming, but they went in and they started doing everything online and they just really flourished because they became they highest volume payday lending operation in the United States. Between 2008 to 2013, he had almost 4 billion in revenue.
BRIAN KENNY: Wow. And he starts to be able to live the lifestyle that he wants, which was not, he wasn’t an introvert. Put it that way.
AIYESHA DEY: Yeah. No.
BRIAN KENNY: Talk little bit about what his lifestyle was like.
AIYESHA DEY: His passion was auto racing, but off the racetrack, he had an extravagant. So he owned a $2 million home in Leawood, Kansas, $8 million home in Aspen, a private jet. When you have a private jet, you’ve made it. He had a luxury car collection with six Ferraris and four Porsches. So he ended up-
BRIAN KENNY: He did get the Porsche.
AIYESHA DEY: He did get the Porsche. So yeah, but his passion was auto racing. He had, I think in 2006 he purchased a race car, hired a professional coach to teach him how to drive competitively and also established and founded the Level 5 Motorsports team, which went on to do very well. How he got into auto racing or what sparked his interest in it, who knows. But he eventually became a pretty good driver himself. So, his coach says he lacked natural talent. He started at a much later age, but he eventually became a very, very good driver. I mean, that says, that speaks to his perseverance, hard work. So, he did have a lot of …
BRIAN KENNY: I guess a comfort with risk taking. Right. I mean, he was a lot of personal risk in driving a race car, but somebody who has thwarted the law to the extent that he had at this point probably felt a little bit like he was, he couldn’t be hurt.
AIYESHA DEY: Right. And I mean that also plays into this other characteristic that could comes up in class. So, I ask my students, so why didn’t he stop even in his business when the first customer complained or when initially he was getting into trouble? He had already made several hundred million by then. Why not walk away? I mean, there’s so much risk involved. Why do it anymore? It comes up that he could be also exemplifying the strait of overconfidence. Overconfident people, they don’t see the full range of risks. They underestimate the personal costs and they just keep going. And this is something nice that students see, even in well-meaning context, not just for doing bad things, even for doing good things. Knowing when to stop is also a valuable leadership quality.
BRIAN KENNY: So, based on what you found out about him, do you think that he maybe, maybe in his heart really thought that he was helping his customers, he was doing a good thing for them?
AIYESHA DEY: He kept saying that, “Our business offers a much needed service to a lot of people who don’t get credit anywhere else.” So maybe, initially, I believe when he started his business, he could rationalize by saying, “You know what? The attorneys say everything is fine. I am disclosing based on industry norms. The law says, do this. I’m going to put it all out there. And so I’m fine.” He could have rationalized it away. On the other hand, as soon as the customer complaints started coming in, if you are having all these people complaining about it, as a leader, you could dig into it. You could set up a review board to figure out why are they unhappy? What else can we do? He did none of that. He knew the customer profile was not very sophisticated. They wouldn’t be able to read and understand. He wasn’t stupid. So, it’s not that he didn’t understand that. I’m sure he got to know that. Further, one of the things he was doing in his company was he had these sham corporations. He was using Native American tribes and pretending that they were the owners of his business. So he could thwart state laws on what is the maximum APR he could charge. So, he was aware that he was clearly doing something that was not ethical, but if he was still able to rationalize it away by thinking he’s helping people, that just further tells you his value system that puts so little weight on the welfare of others, that he became insensitive to it. Maybe he thought, “You know what? I’m a businessman. I’m going to use every loophole the law provides and that’s just doing savvy business.”
BRIAN KENNY: We’ve heard that before actually. Yeah. So what happened? How did it all come, how did it all unravel for him?
AIYESHA DEY: So, the customers complained. There were a couple of states that went after him, but he was exonerated. So, they said he was perfectly legal. But then what happened was in 2012, the feds started catching up. The FTC sued him. The Department of Justice came after him with criminal charges because he, they were like, he violated TILA disclosure requirements. They were not clear. They were not understandable. And eventually he was convicted on 14 charges, including racketeering, misleading disclosures, fraud. So he was eventually sentenced to 16 years, eight months. And he’s currently in prison scheduled to be released in 2032.
BRIAN KENNY: So, what can listeners take away from this? If you think about the big lesson, the big picture of Scott Tucker, he evaded the law for a long time. There’s still a lot of other businesses that are probably practicing some of the same things that he did out there. But if there are people listening to this podcast right now who find themselves in a weird ethical place, what would you tell them?
AIYESHA DEY: May I answer in two parts?
BRIAN KENNY: Sure. Go ahead.
AIYESHA DEY: So, one big thing, I think the reason I wrote this case, if there was a punchline to it that is that leaders form the heart of a corporate governance system. It’s not okay to just follow, to check the box with governance regulations and follow the letter of the law only to abuse it for personal gain. So, any regulation or norm is only going to be effective if it’s taken seriously. However, on the other hand, by creating a positive corporate culture, one that embodies ethics, self-restraint, a commitment to serve, a transparent information environment, a company’s leader can exemplify a key force in the corporate governance system. So leaders really form the heart of this whole thing. For someone who is in the leadership position, I mean, not everyone is going to be Scott Tucker. I do believe a very small proportion of leaders or people truly have that bent that I’m just going to, I don’t care about others. But a vast majority who do end up committing crimes perhaps don’t intend to do so. So as a leader, how do you hold yourself accountable? Surround yourself with people who will not be afraid to ask tough questions, like a board with people who will not be afraid to say, “I don’t think this is the right decision, or why are you doing this?” Or challenge you. What else would you set up? Even if you’re not in a public company, voluntary audits, for example. Have an auditor audit everything. Make sure there’s a strong culture and systems in place that employees and those below you in the company are not afraid to speak up if they see something is going wrong. Think about what mechanisms you want to put in place so you can hold your yourself and others accountable so you don’t go down that very slippery slope of fraud.
BRIAN KENNY: And I think what you’re saying is don’t do this because you think you can get away with it or you can even prove that you didn’t do anything illegal. You should be doing the right thing by your customers and your employees because it’s the right thing to do.
AIYESHA DEY: Earning the trust of your employees, your customers, your investors, that’s the first step to making a positive difference in the world. Because if you think about Tucker, perhaps at some point, he like the lawyers are vetting this.” Tim, he’s an attorney. He says it’s fine. He just didn’t care further than that. But if his lawyers and if Tim were the right people, perhaps they would’ve said, “Scott, we need to rethink this.”.
BRIAN KENNY: We should point up by the way that Tim’s in jail too. So, it didn’t work out for Tim either.
AIYESHA DEY: Exactly. I think he was sentenced to seven years or eight years.
BRIAN KENNY: So, at least there was some justice in this case, but it’s a fabulous case.
AIYESHA DEY: Thank you.
BRIAN KENNY: Thank you so much for being here to discuss it with us.
AIYESHA DEY: Thank you for having me.
BRIAN KENNY: We are excited to be celebrating the 100-year anniversary of the case method at Harvard Business School. If you want more on the history of the case method, visit our website: www.hbs.edu/casemethod100. Cold Call is a great way to get a taste of the case method, after all each episode features a business case and its faculty author. You might also like our other podcasts: After Hours, Climate Rising, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. If you enjoy Cold Call or if you have any suggestions, we want to hear from you. Write a review on Apple Podcasts or wherever you listen or email us at [email protected] Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School, brought to you by the HBR Presents network.